I read an editorial in today’s New York Times, where they have different bankruptcy resources, that discussed the failure of federal agencies that are supposed to keep up with deceptive and unfair practices in the banking and credit card industries. As a consequence, many hard-working Americans who pay their bills are mired in debt and in danger of losing whatever savings they have. Many might even be at risk of losing their homes!

The editorial urged Congressional action and discussed that in Congressional hearings this spring held by Senator Carl Levin, the abusive policies were highlighted. There was testimony from one witness in which the person had exceeded the card’s $3,000 limit by $200 triggering penalties and interest that amounted to $7,500! After paying an average of $1,000 per year for six years, the witness still owed a balance of $4,400!

While this evidence is anecdotal, the phenomenon has become too common. The editorial cited teaser packages that “bombard” unwary customers. These packages promise low interest rates to start, yet reserve the right for the credit card company to raise rates whenever they want. These provisions are buried in deliberately arcane contracts that run 30 pages long and that “even lawyers have trouble understanding.”

The Congressional investigations and studies by consumer advocates exposed even other deceptive practices such as penalty rates being applied retroactively (higher rates being applied to purchases made before the penalty was incurred or in some cases even on debts that were paid off). One witness pointed out at the hearings that the credit card industry “is the only one allowed to increase the price of a product after it has been sold.”

The editorial also cited the credit card company policy of “universal default” wherein a credit card company can apply high interest and penalty on a credit card for missing payments with a different company! The hearings also discovered the practice of “double cycle billing.” This practice describes credit card policies of charging interest on the full balance in a cycle, even if someone has paid off a large majority of the balance. For example, a cardholder who pays $450 of a $500 balance is still charged interest on the entire amount, not just the $50 remaining.

The editorial goes on to point out that there used to be usury laws in most states that prevented these practices, but those laws have been preempted by federal regulations that are designed to make banks and credit card companies happy.

The editorial went on to support the legislation proposed by Michigan Senator Levin that proposes to limit “penalty” interest rates to an additional 7% above the previous rate and would prohibit proactive penalties and the practice of “double cycle billing.” The proposed legislation would also limit the amount of fees companies could charge customers who exceed their credit limit.

The editorial says this bill is a good “start,” but urges a “comprehensive” approach to the problem. Such an approach should include banning deceptive card offers outright, strengthen federal oversight and toughen truth-in-lending laws toward credit cards.